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Harley-Davidson’s Earnings Miss Is A Sign Of More Pain Ahead

It’s no tip that marketplace conditions have not been that good newly for a iconic motorcycle code Harley Davidson, Inc. (NYSE:HOG). Due to concerning sales numbers, a miss of offered direction, an overvalued stock, and an capricious destiny for a stirring electric Harley, we trust HOG shares are due for continued declines in a middle term.

Trends

The latest quarterly report seems to prove concerning trends are going to continue in 2018. While 2017 product income did kick estimates ($1.23B vs. $1.11B), Harley says worldwide sell motorcycle sales fell 6.7%, and forsaken 8.5% in a U.S.

And it’s not customarily a tough 2017 that stirred a sell-off. Management expects to boat customarily 60,000 to 65,000 motorcycles in Q1 of this year, and customarily 231,000 to 236,000 motorcycles during 2018. This represents a decrease in section shipments of 4-5% from a pivotal metric that already declined 8% in 2017.

This is because a batch (deservedly) got strike after a report: while Harley-Davidson seemed to post good sales numbers, a disappearing motorcycle shipments and low projections for 2018 prove to me that there’s difficulty ahead. The US conveyance numbers are of sold regard – even with a strengthening economy and consumers with some-more income in their pockets, Harley-Davidson is carrying issues offered a bikes. It’s flattering formidable to sell to a millennial demographic on a 20 grand motorcycle when they customarily make 40-50 grand a year out of college.

However, infrequently a marketplace overreacts to bad news, and it’s a good time to demeanour into Harley’s business to see if it’s sincerely valued or undervalued.

Valuation

Harley-Davidson batch is trade about $50 per share, that is roughly 16.5 times earnings. This seems sincerely reasonable yet a demeanour during a PEG (price to gain to growth) ratio and cost to book (P/B) ratio tells a rather opposite story. As of a time of this writing, Harley-Davidson’s PEG and P/B were 1.44 and 4.396, respectively.

As a draft indicates, any value larger than 1 means a batch is overvalued, and anything subsequent one suggests a batch is undervalued. Harley-Davidson’s PEG means that even after a high sell-off, a expansion intensity of a organisation is not sufficient reflected in a batch cost – it competence be labelled too highly.

The P/B ratio implies that Harley-Davidson batch is not using too extravagantly forward of projections, yet again, there is unequivocally room for a batch to keep disappearing during 4.396 times book.

Another process to establish share cost is a Gordon Growth Model. To their credit, Harley-Davidson has been augmenting their division yearly for several years, yet during a slower and slower pace.

(Source: Stock Insider)

For consequence of argument, let’s assume Harley-Davidson’s $1.46 division will boost 4% this year. At a shutting cost on Jan 31 of $48.46 a share, a batch would need to conclude 9.7% for Harley-Davidson to strech $53.15 per share – a many new researcher accord guess for a price. Plugging a numbers in to a regulation P = D1 / (k-g) gives us a satisfactory share cost of P = $1.46/(0.097-0.04) = $25.61 per share. This represents about 53% downside.

Do we unequivocally trust a batch is going to void that much? No. we cruise what a Gordon Growth Model and a PEG ratio in sold illustrate, however, is that Harley-Davidson batch is still drifting too high, even after a post-earnings slide.

Future Prospects

A Harley-Davidson electric motorcycle is in a works, and this competence be a intensity game-changer. However, it is too shortly to contend how most intensity this competence have, and either a marketplace even wants such a product. Harley-Davidson constructed and tested an electric sow antecedent famous as a “LiveWire” in 2014. Though it could go from 0 to 60 miles per hour in 4 seconds, it could customarily go for 50 miles, and faltered when compared to electric peers. Bloomberg reported that “By comparison, Zero’s SR hits 60mph in 3.3 seconds, and a Mission R racer has a tip speed of some-more than 150mph, with a sub-3-second scurry time. A customary Ducati Monster 1200 motorcycle can strike 60mph in customarily underneath 3 seconds.”

A switch to electric, even for customarily one bike in a lineup, is no certain gamble to save Harley-Davidson. Adopting electric record competence seem like a foregone end in normal newcomer vehicles, yet a outrageous partial of a knowledge in roving a motorcycle comes from a sound and feel of a explosion engine. Harley-Davidson attempted to conduct this intensity problem off when it introduced LiveWire behind in 2014 by building an synthetic sound that whined as a riders cranked a throttle, yet it wasn’t accurately adequate to disturb a people who rode it…If Harley-Davidson can find a approach to make an electric motorcycle sound as good as it looks and feels, maybe a subsequent proclamation won’t be accompanied by some-more bad news.

A indicate in Harley’s preference is that a categorical offered indicate of their motorcycles isn’t indispensably performance. It’s a iconic code name and a knowledge of owning a Harley. As Warren Buffet once quipped, “I don’t know if Harley Davidson batch is value $20 or $30. we like a business where business tattoo their name on their chest – I’m not certain we can go around doubt those guys!”

However, a pivotal problem we see with a new electric motorcycle is that it doesn’t unequivocally residence a company’s large marketplace need. It alienates a core demographic Harley already markets to, and Harley-Davidson’s solitary electric indication competence be too little, too late opposite extreme competition. As Harley-Davidson seeks to ramp adult prolongation of these electric hogs and put them on a highway by 2019, a essential doubt for impending and stream shareholders is this: will there be a estimable lapse on investment? Can Harley-Davidson furnish electric motorcycles that paint a code good and communicate value?

Market analysts plan that a electric motorcycle marketplace will grow by 45% by 2020. While this is enlivening news for Harley’s electric endeavors, they’ll need to be means to contest with confirmed competitors that have higher technicals when compared to a LiveWire prototype.

Another eventuality to note is a new taxation bill. Since taxation rates will be cut from 39% to 25%, Harley-Davidson will have a few some-more dollars to accumulate in a bank instead of profitable them out to Uncle Sam. This will assistance their change piece with some accounting sorcery in 2019 – right when a electric hogs should be unequivocally removing into gear.

Conclusion

Harley-Davidson appears somewhat overvalued when looking during gratefulness metrics, and a dwindling sales and worrying trends are pivotal indicators that it’s not a batch to get into for a middle term. The electric motorcycle could be a outrageous event for Harley, however, and impending long-term investors will need to sign a intensity for such a product as they cruise investing their capital. I’d wait for a downturn to float itself out before jumping in, and customarily if we truly trust Harley-Davidson can govern a turnaround. If we are a stream shareholder, it competence be best to sell out and demeanour for stronger investment possibilities elsewhere.

Disclosure:I/we have no positions in any bonds mentioned, and no skeleton to trigger any positions within a subsequent 72 hours.

I wrote this essay myself, and it expresses my possess opinions. we am not receiving remuneration for it (other than from Seeking Alpha). we have no business attribute with any association whose batch is mentioned in this article.